The following is a list of highly shorted stocks that have seen operating cash flows accelerate faster than net income during the most recent quarter. Since these companies are generating cash at a faster pace, it might offer an interesting starting point for short squeeze ideas...
To create this list, we started with a list of over 120 US stocks with short float above 15%. We then crunched the numbers on their financials, and identified a list of companies that have seen a big jump in their operating cash flow growth relative to net income growth during the most recent quarter. (Note: For this screen, we use the equation Operating Cash Flow = EBIT + Depreciation - Taxes).
Operating cash flow is arguably a better measure of a business's profits than earnings. Given the trends mentioned above, some might think these companies are set for a potential short squeeze. Do you agree?
Financials data sourced from Google Finance.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.
1. Hornbeck Offshore Services, Inc. (NYSE:HOS): Shipping Industry. Market cap of $769.43M. Short float at 19.13% (equivalent to 5.72 days of average volume).
Net Income grew by 32.17% ($18.2M vs. $13.77M y/y), while Operating Cash Flow grew by 46.44% ($52.28M vs. $35.7M y/y) (comparing 3 months ending 2010-09-30 vs. 3 months ending 2009-09-30).
HOS appears to be undervalued relative to book value. Price/Book ratio at 0.93, much lower than the industry average of 3.42.
Other Highlights: Over the last year, the company has proven itself to be more profitable than its industry competitors. Trailing twelve month (TTM) gross margin at 48.83%, higher than the industry average at 36.16%. TTM EBITD margin at 40.09% vs. industry average at 28.7%, while TTM operating margin came in at 26.19%, higher than the industry average at 18.61%. However, the company had a weaker than average pretax margin, reporting a ratio of 13.76%, lower than the industry average at 16.37%.
2. hhgregg, Inc. (NYSE:HGG): Electronics Stores Industry. Market cap of $587.31M. Short float at 27.08% (equivalent to 10.42 days of average volume).
Net Income grew by 18.39% ($26.91M vs. $22.73M y/y), while Operating Cash Flow grew by 23.74% ($35.13M vs. $28.39M y/y) (comparing 3 months ending 2010-12-31 vs. 3 months ending 2009-12-31).
The stock has performed poorly over the last month, losing 20.1%, resulting in attractive valuations. The P/E ratio, based on the most recent quarter's earnings, stands at 5.6, lower than the industry average at 22.47, while the P/E ratio, based on trailing twelve month earnings, stands at 13.69, which is lower than the industry average at 16.53. The company also appears to be undervalued relative to projected earnings growth. PEG ratio at 0.75, vs. an industry average at 1.15.
Other Highlights: Institutional and mutual fund investors have been net purchasers of the company's shares over the last two quarters, suggesting that the smart money thinks there's more upside to the stock. Institutional investors have been net buyers of 1.9M shares during the most recent quarter, vs. 4.5M net shares purchased in the previous quarter. Mutual fund investors have also been optimistic on the stock. They were net buyers of 1.5M shares during the most recent quarter, vs. 654.5K net shares purchased in the previous quarter.
3. Bio-Reference Laboratories Inc. (NASDAQ:BRLI): Medical Laboratories & Research Industry. Market cap of $621.05M. Short float at 24.02% (equivalent to 25.29 days of average volume).
Net Income grew by 19.5% ($8.58M vs. $7.18M y/y), while Operating Cash Flow grew by 21.38% ($9.88M vs. $8.14M y/y) (comparing 3 months ending 2010-10-31 vs. 3 months ending 2009-10-31).
The stock has a relatively low correlation to the market (beta = 0.71), which may be appealing to risk averse investors.
Other Highlights: Judging by trailing twelve month (TTM) ratios like Return on Equity (ROE), Return on Assets (ROA) and Return on Invested Capital (ROI), it's clear that the company's management is doing an excellent job. TTM ROE at 20.49%, higher than the industry average at 17.9%, TTM ROA at 12.68% vs. the industry average at 6.71%, and TTM ROI at 16.16%, higher than the industry average at 11.34%. The company also outperformed its industry competitors in terms of the TTM Return on Sales ratio (6.32% vs. the industry average at 4.52%).
4. Quality Systems Inc. (NASDAQ:QSII): Healthcare Information Services Industry. Market cap of $2.37B. Short float at 27.58% (equivalent to 31.73 days of average volume).
Net Income grew by 33.31% ($17.53M vs. $13.15M y/y), while Operating Cash Flow grew by 34.23% ($17.92M vs. $13.35M y/y) (comparing 3 months ending 2010-12-31 vs. 3 months ending 2009-12-31).
Other Highlights: When compared to industry competitors, the company reported better than average profit margins during the most recent quarter. Gross margins came in at 68.54%, higher than the industry average at 46.33% (most recent quarter, annualized). Operating margin came in at 28.06%, higher than the industry average at 13.44%, while net profit margin came in at 28.06% vs. the industry average at 13.44%.
5. Digital Realty Trust Inc. (NYSE:DLR): REIT. Market cap of $5.26B. Short float at 21.8% (equivalent to 13.46 days of average volume).
Net Income grew by 44.4% ($35.22M vs. $24.39M y/y), while Operating Cash Flow grew by 44.54% ($147.78M vs. $102.24M y/y) (comparing 3 months ending 2010-12-31 vs. 3 months ending 2009-12-31).
Other Highlights: The company has a track record of outperforming its competitors. Over the last five years, EPS grew by 22.16%, higher than the industry average at 3.11%, while revenues grew by 33.07%, outperforming the industry average at 7.41%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.